Sat. Aug 20th, 2022

Irish Finance Minister Paschal Donohoe



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antonio cotrim/Shutterstock

Ireland threw a wrench this week in the Biden Treasury’s plans for a new global minimum tax. “I absolutely support and will be making the case for our 12.5% tax rate,” Finance Minister

Paschal Donohoe

said regarding the global negotiations. He has “significant reservations” about setting a higher minimum rate.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger.

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It might surprise you to learn that Ireland’s recent tax history includes raising rates on some activities. The story starts in the 1950s when Dublin adopted a zero tax rate on exporting businesses and companies in a special economic zone near Shannon. Those tax breaks were explicit subsidies, in an era when many governments used targeted tax breaks to steer their economies.

But in the 1970s, when Ireland joined what later became the European Union, the bloc’s rules prohibited such blatant export subsidies. Dublin at first responded by playing the same game as other European giants—offer tax subsidies but less aggressively. Ireland raised the corporate rate on manufacturers to 10%, compared to a rate for everyone else that sometimes hit 50%. Over time Dublin expanded that preferential rate to other industries such as financial services.

The impending phase-out of those tax subsidies in the late 1990s under an EU mandate led Dublin to think again. And it pioneered a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform, and from then on Dublin was out of the tax-subsidy business.

Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. Ireland became a destination for global capital.

Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

Some economists on the left downplay tax policy’s role by claiming Ireland benefited from an influx of EU subsidy money for public works. Yet Ireland’s economic growth in the early 2000s outpaced other lagging EU economies that received similar subsidies as a share of GDP. Low tax rates, equally applied, made the difference.

The other ingredient in Ireland’s tax success had little to do with the rate and everything to do with politics. To wit: Politicians across the ideological spectrum refused to play games with tax policy. The 12.5% corporate rate has endured for more than 20 years, through governments left and right. Even Sinn Fein, the furthest left major party in Ireland, declares it won’t change the corporate rate.

Irish politicians know that businesses value certainty, and that Ireland’s low-tax policy has become emblematic of a commitment to consistency. The political class promises not to change the rules on a whim to favor some businesses or punish others. Global companies are eager to take up this offer.

That’s a lesson for Washington and other capitals. As damaging as the high rates the Biden Democrats are proposing is the signal to businesses that tax policy remains a political football even after a once-in-a-generation overhaul like the 2017 Tax Cuts and Jobs Act. Let’s hope Ireland and a few other tax stalwarts hold out and kill the Biden global tax scheme.

Main Street: The Democrats’ proposed tax deduction for the rich puts the Vermont socialist and low-tax Republicans in the same foxhole. Images: Getty Images Composite: Mark Kelly

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Appeared in the May 28, 2021, print edition.

By rahul